Stochastic calculus, part calculus and part statistics, is an integral part of option pricing that can be intimidating. By developing the statistical nature of stochastic processes and introducing Monte Carlo simulation using Microsoft Excel, this paper develops a visualization of how stochastic processes are evaluated using Ito's lemma and integral calculus. Ultimately, the Black-Scholes (1973) option pricing equation is the natural result.
Copyright © 2003 Financial Management Association. This article first appeared in Journal of Applied Finance 13, no. 1 (Spring 2003): 56-65.
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Arnold, Tom, and Stephen C. Henry. "Visualizing the Stochastic Calculus of Option Pricing with Excel and VBA." Journal of Applied Finance 13, no. 1 (Spring 2003): 56-65.